Trade based on how you expect the stock market to move

futures market
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Do you follow the stock market?

Have you been keeping a track of its ups and downs and even been correctly anticipating which way it will go?

And do you wish there was some way you could invest based on this broad market movement…without having to study specific companies and industries?

Well, of course, there is!

You could do short term trades on Nifty futures.

Now before you dismiss this idea, thinking it must be too complicated, we tell you that it’s not.

Just like you don’t really have to know the engineering that goes into a car to be a good driver, you could trade in Nifty futures by simply knowing how to execute a trade and having a sound view on the direction of the stock market – upwards or downwards. And of course, you must know relevant safety instructions…which we will tell you at the end of this article.

Trading in Nifty futures

Let’s say you expect the stock market to move upwards in the near future.

You could buy Oct2019Nifty futures in the futures market. It’s called an ‘Oct2019’ contract because it expires on the last Thursday of October 2019, i.e. on 31 Oct 2019 (To know more about contracts and their expiry click here).

The Nifty closed at 11700 on Friday, 18th October. So, you could purchase Nifty futures at around that rate when markets open next.

According to the exchange rules, you have to buy or sell Nifty futures in lots of 75; this means that the minimum amount you can purchase is 75. Naturally, you could purchase more lots, funds permitting.

As a result, the value of your trade at the Friday, 18th October closing rate, would be Rs 8.75 lakh (Rs 11700 X 75).

Don’t panic. The good thing about trading in the futures market is that you do not have to block the entire value of your trade; you have to put up only the margin amount, which is a percentage of the trade stipulated by the exchange. The exchange changes this percentage on a daily basis, based on algorithms that take into account various variables including variation in price, etc.

The margin amount on Nifty futures is usually around 10-12% but could be as low as 8% or higher than 12%. But it’s broadly in that range.

So, coming back to our example, let’s say the margin is 10.85% and you have to block funds of around 95,000 to buy one lot of Oct 2019 Nifty futures.

In addition to this, you would also have to keep some additional funds in your trading account to meet mark-to-market requirements. Mark-to-market simply means that you have to make good any loss in your position on a daily basis. So, for instance, if your purchase price was Rs 11700 and the index closes at 11600 the next day, (a fall of Rs 100 from your purchase price), you would be required to pay Rs 7500 (100 x 75)to your broker, to cover the mark-to-market loss. On the flip side, if the index closed at 11750, you will receive a credit of Rs 3750 (50*75) from your broker.

Once again, coming back to your trade, you can hold on to your position until expiry, which in our example is 31st October 2019, or you could sell it off any time till expiry.

Contracts and their expiry

Every month, fresh 3-month contracts open up for trading, on the next working day after the last Thursday of the month (i.e. a day after the 3-month-old contracts expire). Accordingly, on November 1, 2019, Jan2019Nifty contracts will begin trading.

As a result, at any point in time, there are 3 contracts available –

  • Current month contracts: that have started trading three months ago and will expire at the end of the current month;
  • Next month contracts: that have begun trading two months ago and will expire next month and
  • Far month contracts: that have started trading a month ago and will expire two months down the line.

Practically speaking, the current month contract always sees the most trading volumes.

Scope for trading

So far, we have only talked about buying Nifty futures. However, if you believe that the equity market is likely to move downwards in the near future, you could sell Nifty futures too.

A quick glance at the range of movements in the Nifty between August and October 2019 so far, reveals that the index does move sufficiently to give you enough scope to make some money off these movements.

How much did the Nifty move in August, September and October so far…

Cautions you must exercise

Know your limits: Always remember that futures market trades are leveraged. This means that the actual value of your trade is a multiple of the amount that you are putting up as margin. In the case of Nifty futures, the value of your trade is almost 10x your margin money. So, any movement in the index – in your favour or against you – will get magnified to that extent. Be very cautious with the amount of funds you choose to trade with.

Set stop losses: To prevent yourself from getting carried away, set stop losses when you trade. This will act like a safety net and prevent you from making more losses than you can afford. To know about what stop losses are, how you can set them and more, read our article Making Stop-loss your Safety Alarm in the Markets.

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Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

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